1031 Exchanges + Tax Reform = Permanent Tax Reduction

Comprehensive tax reform is here, and Congress is moving the legislative text through its final stages. Final voting is expected before the end of the year, with the new legislation to become effective for 2018. With Section 1031 retained for investment and business use real estate, but repealed for personal property (equipment, autos, machinery, etc), the new legislation presents a unique opportunity for exchangers to permanently reduce tax liabilities. There’s a very short window. If the new tax legislation passes, Section 1031 exchanges of personal property will only be allowed on sales that occur through December 31, 2017.

The Opportunity

Equipment owners can defer current tax liabilities into a post-tax reform future, allowing gains to be recognized within a lower tax rate environment. This “tax arbitrage” strategy can result in permanent deferrals and once-in-a-lifetime opportunities for businesses.

If the proposed tax legislation passes this year, then lower tax rates are right around the corner. As of December 15, 2017 the corporate tax rate, as proposed, would be reduced from 35%, down to 21%. This 14% reduction creates a potentially large tax saving opportunity for owners of heavy equipment.

Example - $14k in Permanent Tax Reduction

Suppose an equipment owner sells equipment prior to the end of 2017, within a high tax environment (35%). Wisely, the owner chooses to give the 2017 sale like-kind exchange treatment, effectively deferring $100,000 of income taxation.

Assuming the current tax reform bill passes and is signed by President Trump, future years will have a lower tax environment (21%) and disallow equipment from Section 1031 treatment. The downside, no Section 1031 treatment will cause or trigger the owner to recognize the $100,000 tax deferred in the prior year. However, the equipment owner’s recognition of income in a 21% tax rate environment could permanently save $14,000 in taxation – the difference between the 35% and 21% tax rates.

Summary – Initiate an Exchange before Year's End

If your business has equipment, machinery, or other assets that you are thinking about replacing, don’t let this opportunity go to waste. Engage with your tax advisor and qualified intermediary and begin making plans to sell before the end of the year. With proper planning, 2017 tax reform could present your business with an exciting opportunity.